Why Washington Watches Japan's Yen and Bond Markets

Concern in Washington over Japan's depreciated currency and sovereign debt market stems from Tokyo being its largest foreign creditor. Last week, President Donald Trump brought the yen's weakness up directly with Prime Minister Sanae Takaichi.

Finance Minister Satsuki Katayama revealed the conversation on Friday. The yen weakened to almost 164 against the dollar in late July, a four-decade low, and was recently trading around the 157 mark.

Tokyo Holds the Largest Foreign Share of US Debt

No other foreign nation holds more US Treasury bonds, the debt instruments the American government issues to finance its operations, than Japan. As of May, Tokyo held over $1.1 trillion of them, the CFR reported.

To support the yen's value, Japanese authorities sell dollars in exchange for yen. According to analyst calculations, Tokyo has spent roughly $167 billion on these interventions this year, financing them partly through Treasury sales.

A smaller pool of buyers pushes the US government to provide higher returns on its bonds. The benchmark 10-year Treasury yield, which is tied to mortgage rates, climbed to 5.18% on September 24, based on Federal Reserve data.

The US and Japan coordinated a yen purchase on July 31, a joint intervention not seen since 1998. Treasury Secretary Scott Bessent subsequently challenged traders to wager against a strengthening yen.

“I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese… are going to do. And you can bet against me if you want,” Bessent stated.

Higher Yields in Japan Risk Repatriating Capital

For years, Japanese investors purchased US debt because domestic bonds offered negligible returns. The Bank of Japan changed this dynamic by raising its benchmark rate to 1.25% on September 18, the highest level since 1995.

Tokyo's 10-year bond yield reached a 30-year peak of 3.115% on Friday. Analyst firm Bull Theory observed the two-year yield hitting a 31-year high of 1.975% on Monday. Bloomberg reported that market wagers on further rate increases fueled the rise.

According to the CFR, Japanese authorities have suggested that the state pension fund could replace foreign bonds, such as Treasuries, with domestic Japanese bonds.

A Depreciated Yen Complicates US Commerce

A weaker yen lowers the dollar price of Japanese exports. Prime Minister Takaichi stated that Trump told her American trade “has been tough due to the yen’s depreciation,” as relayed by Jiji.

Implications of Japan's Bond Market for Bitcoin

The connection between Japan's bond market and Bitcoin lies in the yen carry trade. This involves borrowing at low yen rates to invest in higher-yielding assets, including Bitcoin (BTC). When the yen strengthens or Japanese rates move higher, these loans become more expensive, prompting traders to sell down positions to meet their repayment obligations.

This scenario played out in August 2024. The Bank for International Settlements (BIS), a Swiss-based institution owned by central banks, reported that a sudden spike in the yen triggered a rapid exit from yen-funded positions.

According to the BIS, Japan's TOPIX stock index dropped 12% on August 5 that year, and Bitcoin and Ethereum declined by up to 20%. The BIS estimated that roughly $250 billion in carry trades were in place before the selloff began.

So far, this year has followed a different pattern. BeInCrypto noted that although the yen appreciated by 3.7% over three sessions in early September, Bitcoin remained above $79,000.

BeInCrypto earlier highlighted simultaneous tightening by the Fed, the European Central Bank (ECB), and the Bank of Japan as the primary macro risk for Bitcoin. All three central banks have since increased their rates. On Monday, Bitcoin was trading at $82,873, a 2.3% decline on the day.

Finance Minister Katayama stated that any future support for the yen would draw on a Federal Reserve lending facility rather than involve selling US Treasuries, a shift reported by OMFIF.